This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Regulators, Legislators Focus on Payroll Cards

Employers must comply with a patchwork of state laws.

Payroll cards, onto which companies load workers’ wages, are growing by leaps and bounds. Their popularity is being driven by the savings the cards afford employers and the growing number of employees without bank accounts. But the cards have also become a target for state legislators and regulators over the last year.

“We’re moving into a climate of tighter regulation of payroll cards,” said Patricia Smith, a partner at the law firm Ballard Spahr.

That could spark concerns for many companies nationwide. According to Aite Group, $34 billion was loaded onto 4.6 million payroll cards in 2012, up from $20.9 billion loaded onto 3.1 million cards in 2010. Aite’s analysts predict the use of payroll cards will grow at a compound annual rate of 19.9% through 2017, when they project that there will be 10.1 million paycards in use, with $68.9 billion loaded onto those cards annually.

Proponents say the cards benefit both employers and employees. NACHA estimates companies save from $2.87 to $3.15 each time they pay a worker by direct deposit rather than with a paper check, and the savings for using a paycard are comparable. According to the Aite report, about 90% of U.S. workers were paid via direct deposit in 2012. Paycards help companies eliminate even more paper checks by extending electronic payments to workers who don’t have bank accounts.

For those workers, being paid with a payroll card rather than a paper check sidesteps check-cashing fees, and many paycards can also be used to make purchases at stores or online.

However, the uptick in proposed legislation and regulatory inquiries into payroll cards followed newspaper coverage last June of a class action lawsuit in which a Pennsylvania woman sued her employer, a McDonald’s franchisee, for offering a payroll card as her only option for receiving her earnings, said Bill Dunn, director of government relations at the American Payroll Association. The suit alleged that the card’s fees would have reduced her earnings below the minimum wage.

Cards Under ScrutinySince then, state legislators and regulators have been looking at the fees on payroll cards and the question of whether employees are given options. New York State Attorney General Eric Schneiderman launched an investigation and issued a report concluding that while payroll cards provide some benefits for employees, “they also have drawbacks for many low-wage workers, especially the 24% of low-income adults who lack Internet access.”

Over the past year, Dunn said, 19 states have considered legislation addressing payroll cards, although only four have passed anything. Some of the bills “weren’t terribly controversial,” he said. “Others were quite a challenge.”

The legislation initially proposed in Hawaii would have banned payroll cards, but the final version combined “consumer protections and allowing flexibility for employers,” he said. A New Hampshire proposal would have been “very restrictive” but didn’t go anywhere, Dunn said, while legislation proposed in New York would “make it difficult for some companies to offer payroll cards because of some of the key provisions.” The New York legislation, put forward by the attorney general, would require employees to give their written consent to be paid via a paycard and would limit the fees associated with the cards.

Last September, the Consumer Financial Protection Bureau issued a bulletin reminding employers that under federal law, they cannot mandate that employees receive their wages on a payroll card. They have to offer another payment method as well, with the alternative payment type governed by state law.

“The number-one thing employers should do to avoid any regulatory risk is be sure they don’t force their employees onto a paycard,” Dunn said. “Employees have to have a choice—they have to have an alternative to a paycard.

“In about half the states, you don’t need to offer paper checks,” he added. “But you still need to offer a choice; you need to offer direct deposit. If you’re not offering any choice at all, that’s a big red flag that you’re in regulatory trouble.”

Ballard Spahr’s Smith noted that, “for the most part, employer aspects fall under state law,” including wage and hour laws and wage payment statutes. Employers that plan to start using payroll cards should make sure that what they’re doing meets the requirements that are being put in place by states, Smith said.

“The most common one is that the employee’s consent has to be obtained in writing before the employer utilizes the card,” she said. “And that consent has to be freely given. It cannot be made a term or condition of employment.”

Another widespread requirement is that workers should be able to withdraw their total wages once each pay period without paying a fee, said Smith, pictured at left. “The employer generally under these statutes is required to furnish a statement of deductions to the employees every pay period. It can mean a paper statement; under some statutes, it can mean the ability to access the information on a computer and print it out for free.

“The other very typical requirement is for employers to disclose to the employees the potential fees they can incur in connection with the card,” Smith said. “There are a lot of fees that can kick in and perhaps be a trap for unwary employees. Some cards have many more fees connected to them than others. Some have balance inquiry fees; others do not. Some have inactivity fees; some do not. Some have withdrawal fees; some do not.”

Some payroll card providers have put together state-by-state matrices to guide employers through the different requirements, said Madeline Aufseeser, a senior analyst at Aite Group.

Still, “it’s the employer who’s ultimately responsible,” Aufseeser said. Employers “should be aware of the state wage and labor laws and work with their payroll provider to make sure they’re doing this properly.”

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.